Estonia Embraces the Cellular Lifestyle

By ALMAR LATOUR

WSJ - February 22, 1999

If mobile-phone usage is a measure of a society's wealth and progress, Estonia has arrived.

In the smallest Baltic state, cellular penetration tops the Central European rankings: It surpassed 16%, while neighboring Latvia and Lithuania showed but 6% and 8%, respectively, late last year. Tallinn, the country's capital, boasts mobile-phone density of around 30% -- more than double, analysts point out, the rates of Moscow or Warsaw.

Why so high? Pride might be a factor, along with Nordic ties. Estonia hosts the mobile-phone assembly plant of Finland's Elcoteq Network Corp., which produces, packages and distributes mobile phones for Telefon AB L.M. Ericsson of Sweden and other telecom-equipment makers.

"There is tough competition, growing wealth and a cultural similarity to high-tech countries like Finland and Sweden," explains Tapio Hedman, a spokesman for Nokia Corp. of Finland, which assembles some of its mobile-phone models in Estonia and has a large distribution center in Tallinn. "Those are the factors for a successful mobile-phone market. It's a complete and mature market."

It grew up fast. In the early 1990s, just 300,000 phone lines served a population of 1.5 million. The state telephone monopoly ran the show, phone lines didn't cover all of the country and sound quality was poor. "Like the rest of the Soviet Union, the telephone system was a dreadful scene," says Laurie Rosendal, telecommunications analyst for Aros Securities in Helsinki. "The phone system was just crying to be changed."

Estonia -- as part of its quick move to privatize state-owned businesses and seek foreign investors after the fall of the Soviet Union -- set about revamping the old phone system. Telia AB of Sweden and Sonera Ltd. of Finland, each hungry to expand beyond their national markets, were invited in. In 1991, after long negotiations, the two Nordic companies struck a deal with the Estonian government to jointly develop the system. Telia and Sonera each got a 24.5% stake in Estonian Telecom, with the state holding on to 51%. In exchange, the Nordic operators invested 200 million Swedish kronor ($25.7 million) in the Estonian operator and provided a 200-million-kronor loan guarantee to overhaul the existing phone system.

Telia and Sonera also brought cellular service to Estonia. Investing four million kronor, the operators created a mobile-phone unit called Estonian Mobile Telephone, or EMT. Today, the outfit is the leading cellular operator in Estonia, boasting 150,000 GSM subscribers, or roughly 60% of the total market.

"We helped the country leapfrog into the mobile-phone age," says Mart Nurk, Telia's vice president for Baltic operations in Stockholm and a board member of EMT. "The government chose to work with strategic investors very early in the game, which gave Estonia a head start on the rest of the former Soviet Union."

EMT didn't have the market to itself for long. Radiolinja Oy, a commercial Finnish operator, made it a contest first. Last year, AS Ritabell, which operates under the Q-GSM trademark, joined the fray; Netcom Systems AB of Sweden has a 90% stake in the operation.

Tough competition has boosted the number of mobile-phone users in the country, as tariffs have declined over the past couple of years. As elsewhere in Europe, various promotional offers are used, including free calling minutes, prepaid calling cards and handset discounts. Such offers have made the mobile-phone market accessible to a wider range of consumers than in the early years.

"The higher the competition, the lower the tariffs," says Sergei Arsenyev, an analyst with Robert Fleming Securities in London. "The markets with the lowest tariffs have the highest penetration."

The subscription boom certainly hasn't hurt Estonian Telecom. In January, the operator launched the largest initial public offering ever seen in the Baltic countries. Confidence in cellular-market growth played a role in investor interest.

But there's more than competition at work here. The influx of Finns has quite likely contributed to Estonia's mobile-phone phenomenon. One million or more Finns visit Tallinn each year, drawn by lower prices for goods and recreation. One out of two probably carries along a mobile phone.

"There appears to be an undeniable link," says Jonathan Lee, telecommunications analyst at Commerzbank in London, "between the close geographic proximity to Helsinki, the frequent visits of mobile phone-wielding Finns in the capital, Tallinn, and the extraordinary growth in mobile penetration there."